Good afternoon. My name is Kasey, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2010 earnings conference call. (Operator instructions) Thank you, Mr. Gosselin. You may begin.

Craig Gosselin

Good afternoon, everyone, and welcome to the Pacific Sunwear of California conference call announcing the company’s fiscal second quarter 2010 financial results. This is Craig Gosselin, Senior Vice President, General Counsel and Head of Human Resources.

This call is being recorded and the playback will be available starting today approximately two hours after the call through midnight on August 31, 2010. It can be accessed at (800)642-1687 or (706)645-9291, pass code 93436717. The call will also be archived on the PacSun website at www.pacsun.com through midnight on November 15, 2010.

Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Mike Henry, Chief Financial Officer. Today's call will be limited to one hour, and questions will be limited to one per participant.

Before I turn the call over to Gary, I'd like to note that statements and discussions during today's call will contain forward-looking information about our future financial performance and prospects. Our actual results could differ materially from those contained in our forward-looking statements. Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our fiscal 2009 Form 10-K and in subsequent filings we made with the SEC, as well as in the earnings press release we issued today.

These documents can be found in the Investor Relations section on our website, pacsun.com. All information discussed on the call is as of today, August 24, 2010. Pacific Sunwear undertakes no duty to update this information to reflect future events or circumstances. This call, the web cast and this replay are the property of Pacific Sunwear. It is not for rebroadcast or use by any other party without the prior written consent of Pacific Sunwear. With that said, I'll now turn the call over to Gary.

Gary Schoenfeld

Good afternoon, and thank you for joining us today. I will start with a few comments about our Q2 results and the mortgage transactions outlined in the press release, comment on the separate press release regarding our exclusive license of the Modern Amusement brand, and continue to provide some overall perspective of having completed my first year as CEO of PacSun. Mike will then provide you with more of the second quarter financial details and our guidance for Q3 of 2010, and then we will look forward to your questions.

Total sales for the second quarter were $218 million, reflecting a comp store sales decline of 10%. Our GAAP EPS loss was $0.36, which on a non-GAAP basis using a normalized 37% tax rate would have been a loss of $0.22.

Highlights during the quarter were the continued improvements in the trending of our Young Men's business, which has improved in each of the last four quarters, and I’m pleased to say it turned the corner to achieve a 2% positive comp for the quarter along with higher merchandise margins.

Our branded board and surf presentation was arguably the best in the mall, and a major shift from 2009 giving us a great platform during the spring and summer, as consumers have clearly shifted to a wear now shopping pattern. Additionally, our select number of shop in shops and collections merchandising are giving brands new opportunities to showcase themselves, and further open the door for emerging brands to once again be featured at PacSun.

With respect to our Juniors business, I noted previously four key elements that we needed to address to create a sustainable growth business for PacSun. Those were strategy, having the right people on the Juniors’ team in place, speed to market and in-store experience. We are making substantial changes and progress in each of these critical areas, and began to have a few small wins in our Juniors business, improving from a negative high 20s comp in Q1 to a negative low 20s comp for the second quarter.

Christine Lee, our GMM of Juniors has now been with us for six months, and our initial efforts to target an older teen girl with a more fashionable aesthetic might be best summed up by a blog posting that Robert noticed last week, which I would like to briefly share with you in case you happened to have missed it. “I have always had a love hate relationship with PacSun. I have just come through about a year of exasperation with them over the preponderance of neon, plaid and neon plaid they insisted on stocking. I get it, the brand is very trend based, but their commitment to trend sometimes means nothing they offer suits my slightly sophisticated late 20s style. I’m sorry if I don’t think hot pink and lime green gida [ph] print hoodies an appropriate item for my lifestyle, but that is the way it goes. A 14-year-old is free to snatch that up, but it is not for me. So imagine my surprise to discover a few weeks ago that I suddenly want to buy everything PacSun is stocking for fall, rich colors, pretty patterns, sweet but simple dresses, and the skirt I’m wearing above. It is just what I’ve been looking for lately.”

She continues on, and I won’t read the rest of the blog, and I will admit that a blog is not quite like having the cover of Vogue magazine, but I think girls are beginning to notice the changes at PacSun. We recognize they have got a myriad of shopping alternatives, so we know we have a lot still to do to become one of their favorite destinations, but I continue to believe in the progress we can make over the next 6 to 12 months.

Turning to marketing, we had some fun during the second quarter that generated new energy and excitement around PacSun both internally and externally. It started with our Saturday Memorial Day weekend promotion, where our brands supported us with free gift items as well as golden ticket opportunities Willy Wonka and the Chocolate Factory, where we had the opportunity to win free trips to unique events or destinations in the US and abroad from Sweden to Australia. The response was tremendous with more than 50,000 customers waiting in line for our stores to open that Saturday morning, and a high level of energy and enthusiasm from our retail teams across the country.

After a more than a few bumps and bruises over the past few years, it felt good to get a taste of winning again. We then followed this up later in June with the first-ever PacSun Summer Solstice Beach Ballyhoo at the Santa Monica Pier. It is a mouthful [ph] to say, but it was awful lot of fun. We brought PacSun and most of our key brands to life in one of the world’s most pre-eminent beach locations in a way that I believe only PacSun could do.

Arguably Volcom went biggest with I think 60 people from both Lee and his team creating their own two-day circus, followed by fun [ph] and creative ideas for almost of their other key brands with WESC, Roxy, Fox, O'Neill and Hurley creating some of the other most popular destinations. Quiksilver brought Tony Hawk along who continues to be amazing to watch in person, and Fox sponsored fantastic BMX exhibitions over the two days.

We also had 13 bands come and play music over the two-day event, which was attended by thousands of people all weekend long with many more turned away as we met or exceeded our capacity constraints at various sites, further exceeding our expectations for more than 100,000 people who participated through the live web cast online. Well, I feel like we’re only beginning to tap into the power of social media, customers are noticing a change at PacSun, whether it is new initiatives like Memorial Day or the Ballyhoo, pausing to take in our store windows or as I like to say billboards in nearly 900 malls across the country, or the unique ways we are featuring brands in our stores, customers are beginning to re-engage with PacSun in ways that haven’t happened for a long time.

Keep in mind that we are not materially increasing our spending on marketing; we’re just attacking this part of our business differently to regain the attention of our team and young adult customers. Related to that, when I joined PacSun last summer, I spoke of the importance of re-establishing our leadership position with our heritage brands, strategically complemented by our own proprietary brand, and a smaller, yet important third part of our product mix, which when tied to PacSun once again becoming a destination for emerging brands.

As we announced today in a separate press release, we have entered into an exclusive licensing agreement with Modern Amusement, a fashion and lifestyle brand owned by Mossimo Giannulli. Moss is a Southern California native and one of the most successful entrepreneurs at blending beach and street lifestyle and fashion over the past 20 years. You probably are familiar with the $2 billion brand, which bears his name that is sold exclusively at Target.

Over the past few years, the Modern Amusement has been sold in the United States through premier retailers such as Nordstrom, Barney's, Fred Segal and Bloomingdales, and internationally through accounts such as Selfridges and Harvey Nichols in the U.K. and Beams in Japan.

The agreement we have entered into is for an initial term of 3 years with our option to extend for an additional seven years, and contains additional licensing opportunities and the potential for developing other domestic and international distribution together with Moss. I’m excited about this opportunity for PacSun to work with him and this coveted emerging brand as it adds another dimension of relevance and uniqueness to our PacSun stores.

Another element of our brand building effort has been our shop in shops program. I noted in our last call that we began testing our first shop in shops with Hurley and Benz during the first quarter. This program has been expanded to now include Fox, Volcom, and most likely Billabong as well. We are in the very early stages of this program, yet we believe this is another positive step in improving our store environment, injecting new energy and finding creative ways of letting our branded partners have a much more complete representation of their brands.

We also announced today that we have entered into mortgage agreements on our Anaheim corporate office and Olathe distribution center that generated an additional $28 million of cash for us. I share the same perspective as our board of directors that often the best time to raise capital is when you don’t need it. We began exploring various alternatives for monetizing our real estate assets last fall when liquidity in the capital markets was particularly tight. These combined mortgage transactions proved to be the most advantageous ways to take advantage of low interest rates providing us additional flexibility as we look to the long-term growth of the business.

While we do not have any specific use of the funds planned at this time, we felt this was a relatively inexpensive and prudent step given the uncertain economic, banking and real estate climate that continues to exist. So as we have reached the midpoint of the year, I continue to be pleased with the caliber of executive talent, creativity and passion that we are attracting to PacSun along with the increasingly strong support engagement of both heritage brands and new emerging brands.

We know we still have a lot to do to achieve our goals for the second half of the year and position ourselves for 2011 and beyond, and some of our most immediate priorities include the repositioning of the Juniors, bringing newness to denim, and continuing to improve the customer connection and selling culture within our stores. Yet, as I said a year ago when I signed on for leading the turnaround of this company, customers want alternatives in malls that have become dominated by vertical retailers. With the new team we’re assembling and a clear vision of PacSun position in today’s competitive landscape, I continue to believe that our unique blend of heritage, proprietary and emerging brands can re-establish PacSun as a favorite place to shop for our primary 15 to 22 year old customers.

Total sales were $218 million this year versus $243 million last year; same-store sales declined 10% with our Young Men's business up low single digits and our Juniors business declining in the low 20s.

We ended the quarter with 880 stores versus 916 a year ago. Merchandise margins improved 210 basis points from last year primarily due to lower markdowns. Non-merchandise margin costs were flat to last year in dollars, but we deleveraged on a lower sales base, including occupancy by 230 basis points and buying and distribution costs by a combined 40 basis points. As a result, total gross margin including buying, distribution and occupancy costs declined 60 basis points versus last year to 23.2% of sales for the quarter.

SG&A expenses declined to $74 million this year from $79 million last year. although SG&A was lower than last year in dollars, in deleveraged 120 basis points on the lower sales base to 33.9% of sales for the quarter.

Income tax expense was $200,000 for the quarter as a result of the continuing impact of the valuation allowance against our deferred tax assets. Our net loss for the quarter was $23 million or $0.36 per share. On a non-GAAP basis, using a normalized income tax rate of 37%, our net loss for the quarter was $15 million or $0.22 per share. We ended the quarter with $25 million in cash and no borrowing-based debt, consistent with where we were last quarter at the end of the second quarter. Total inventories were flat to last year at the end of the second quarter, reflecting the build of inventory levels for the peak of the back-to-school season.

Turning to guidance, given our performance in the first-half of the year, we continue to expect sequential improvement in comp sales trends from quarter-to-quarter with the goal of achieving positive comps in Q4. We continue to expect to deliver improved merchandise margins for the year, but it is unclear whether these improvements will fully offset occupancy deleverage. As a result, we now expect full year gross margins to be plus or minus 100 basis points to last year.

We have continued to carefully manage expenses, and now expect to end the year with total SG&A of $305 million to $310 million versus our prior range of $310 million to $320 million. Within these annual targets, specifically for Q3 we are expecting same-store sales to decline in the range of 4% to 9% compared to decline of 15% in Q1 and 10% in Q2. We currently expect our gross margin rate to decline by 100 basis points to 300 basis points versus last year. SG&A is expected to be in the range of $74 million to $76 million versus last year’s $89 million. This translates to a net loss of $0.15 to $0.25 per share, including the continuing impact of having a very low tax provision.

On a non-GAAP basis, using a normalized income tax rate of approximately 36% to 37%, this translates to a net loss of $0.09 to $0.16 per share for the quarter.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question will come from Adrienne Tennant from FBR Capital [ph].

Adrienne Tennant - FBR Capital

Good afternoon. I wanted to ask a question, while I am happy to hear about the mortgage transactions, what should we expect for the end of year cash balance, should we assume that the cash that is generated from the mortgage transaction should roughly offset cash burn, and then just really quickly Gary, if you could talk about the progress that you are making on the Juniors business, it sounds like on a two-year stock basis, you would look for the comp to improve pretty materially in the back half of the year. So what is the timing we should be looking for kind of a more full impact of the Juniors progress? Thank you.

Gary Schoenfeld

Sure. With regard to the first question, I think you are in the ballpark in terms of thinking of the mortgage as an offset and year-end cash in the range of where it was a year ago. I’m not inclined to be more specific as we haven’t given Q4 guidance, but that is in a reasonable range of expectation. As to the second part regarding the Juniors business, I think Christine continues to be pretty excited about spring and the business she has been able to be involved with from day one.

Having said that, yes, we do anticipate seeing some market improvement as we progress through the second half of the year, and relative to comps in the negative 20s in the first-half of the year, by the fourth quarter, we would certainly expect to deliver substantial improvement relative to that.

Operator

Our next question will come from Janet Kloppenburg from JJK Research.

Janet Kloppenburg - JJK Research

Hi everybody. I wonder Gary if you could talk about the sequential comps during the quarter, and how you are thinking about this progress that these brands have made here in the back to school season, and also if you could talk specifically about the revamped denim program for both men and for women. And lastly when we might see some of the new modern amusement products in the stores? Thanks.

Gary Schoenfeld

So, I’m going to take the last two and then if you want to clarify the first part we can have a go at that. So, with regard to Modern Amusement and we had a great first product meeting with Moss last week with our team. He and I spoke again this morning and our guys were excited about him involved. He was similarly quite complimentary of our team, and I think he won’t mind me saying, so you guys are maybe going to do Modern Amusement even better than we were, and that is a nice compliment.

So we are excited about working with him, and we think that it will be at this point probably summer assortments, which means you will see it in stores sometime in spring of calendar 2011. As to denim and how that is performing, I think as you all saw we have started to bring denim back in in July, many retailers were already very promotional beginning in July, which I think was the beginning of indicating that denim was going to be challenging. And it hasn’t fully met our expectations during back-to-school so far.

I think part of that is the lack of real newness in terms of the trend of denim, but on the positive side what we are seeing also contributing to that is continuation of this wear now pattern. So within our guys business, our overall bottoms business is performing but it is actually shorts driving that more than what we’re historically used to seeing, which should be denim driving that. So fortunately the things that we have been doing in terms of store clustering and localization are supporting our business, but I don’t have a perfect crystal ball how is denim really going to perform as we get further into fall. What I will say is I’m also quite pleased about though is we got two months out of our back-to-school

lead times for denim, and as a result of that we are able in both girls and guys to look at trends we have seen in the early part of back to school so far, and be able to use that as well as some additional product testing that we have been doing to determine our final holiday buys with regards to denim.

Janet Kloppenburg - JJK Research

Okay, and I was only asking about how comp were sequentially during the second quarter, did they improve, were they about the same during the quarter, how was the trend as you flow through May, June, July? Thanks.

Gary Schoenfeld

It is not something we have historically spoken to. So I don’t think I’m going to speak to that.

Operator

Our next question will come from Mitch Kummetz from Robert W. Baird.

Mitch Kummetz - Robert W. Baird

Yes, thanks. Gary, you talked a little bit about the shop in shops in your prepared remarks and you talk about expanding that to a few new brands, could you just remind us how many you had going in the quarter, how did that performance compared to maybe some stores that didn’t have the shop in shops, and kind of what is the plan for the shops going forward in terms of numbers, if you could provide that?

Gary Schoenfeld

Yes, I think at this stage we don’t see it necessarily as a huge financial driver. We think more importantly it is about reengaging with the brands. In the stores where we got the physical space to be able to do it, give the opportunity to showcase brands in a much more interesting way, and you know at this point it is probably roughly 10% of our store group, a little bit more than that that we currently have planned for that.

And you know it is more about just overall the impression it makes in a store. You walk in and you see a Volcom shop in shops or a Fox or Hurley, or just obviously, it lists those

brands individually, but also creates some excitement around the stores as a whole.

Mitch Kummetz - Robert W. Baird

Okay. And then lastly could just update us on your footwear business, and we have seen an expanded offering for back to school, some stores with shoes back on the back wall again. Can you talk a little bit about where you are in reintroducing footwear and kind of how you expect that to play out going forward, and maybe comment on the performance now that you have brought in a few more shoes?

Gary Schoenfeld

Yes, and I think this back to school as we said before was really going to be our first chance at beginning to step up to the plate. Obviously, even the assortment we’re doing right now is still smaller than what other offerings are in the mall. But I am pleased with the initial starts, the three primary brands that we feature. Vans, Nike and DC are all delivering very reasonable performance as we get started in this. We are in active discussions with a couple of other brands that we look forward to adding to the business over the next six months.

Candidly, probably the piece that I’m least satisfied with is in store execution. Having grown up as the long-time admirer of Nordstrom and how well they service people, and I’ve known them quite well for the last 40 years. I think I would be embarrassed if Bruce, Blake, or Pete walked into one of our stores right now to ask for a pair of shoes. But, we’re going to fix that as well and we continue to believe this is an important branded part of our guys business. On the girls side, I’m pleased with the initial launch and we are receiving probably the most positive response is frankly on our proprietary product. So we see some exciting opportunities as we build that going forward as well.

Mitch Kummetz - Robert W. Baird

Okay. That is good to hear. Good luck.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Dana Telsey from Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone. Can you talk a little bit about the drivers in Juniors, what you see there and also what you are learning from back to school to prepare for holiday. And we have been noticing in our tours of the stores, you mentioned about the customers -- about the footwear, we have been noticing an increase in customer service, and definitely there is more enthusiasm. What are you seeing, how do you see that translating going forward, and as you shift the store to more fashion what are you doing to gain new customers and increase the frequency and purchasing of existing? Thank you.

Gary Schoenfeld

Sure. All good questions. So let me take the second one first with regards to service. Well I’m disappointed with our execution on footwear, and I think we have got a lot to learn, and overall I agree with you, and appreciate the feedback. We are hearing that feedback pretty consistently that people are noticing a change in terms of the energy and the engagement with customers.

So, from where we were a year ago, which was we will just say clearly unacceptable with underlined and bold, I think we’re off to a good start in improving that. It is where I want it to be or where Paula expects it to be. Now, I think we still got a lot of opportunity to improve it even further, our product knowledge and the selling culture within our stores, but it is definitely progress, and with close to 11,000 people we can’t change it overnight, but we are making progress.

It definitely will be an important part of our Juniors business, and the ability to sell outfits and speak to the Juniors customer in terms of fashion is a knowledge base and the skill set that we need to continue to work on and developed, and we are committed to doing so. In terms of what we are seeing as far as trends in the Juniors business, there is certainly a category in terms of tank tops that I have spoken of before that we saw progress really in terms of fashion there, in elevating that and recognizing that is an year-round opportunity.

So we continue to be pleased with the potential of how that business unfolds in the second half of the year. secondly sweaters has been the category that we have begun to address in a different way than what you saw in terms of sweaters in the past, again with a bit more fashion and skewed to a girl in her older teens or early 20s, rather than younger teens and we have seen very good response to that.

Thirdly, dresses as a category not historically a big category for us, but as a category dresses have performed well and we continue to see opportunities there. And then accessories, I mentioned footwear, we have also been testing a broader assortment of jewelry and the reaction to those tests have been quite good both in terms of sales, as well as what that is doing to elevate the overall presence in the stores. So, those will be some of the things that we see continuing to unfold and help drive the business in the second half of the year.

Operator

Our next question will come from Moni Shapiro [ph] a retail tracker.

Moni Shapiro

Hi guys, congratulations on moving forward and on the stores, the guy side really does look great. I’m wondering if you could talk a little bit about some of the metrics, but I was wondering, particularly on the Juniors side but overall, are you seeing increases in traffic or has your traffic held steady and you’re just seeing better conversion once they come into the store. And then if you can also just focusing on the Juniors side more, are you seeing a new customer come in or are these customers that were pack shoppers that are starting to come back in and buy a litte bit more here and there?

Gary Schoenfeld

So, I think it is -- again, we don’t have perfect information. We’re, actually as we speak doing some external market research. So, we’re going to have more information with regards to some of those questions the next time that we’re on a call together. So, anecdotally I think we are attracting a combination of new customers and customers like in the blog that I shared with you, who may be gone away from us, and now are finding to a bit of their surprise, they are finding more there to get excited again.

As I mentioned previously on our call, from my impression PacSun has never really had a true sustainable Juniors business beyond what was fairly narrow swim, short and hoodie business when action sports brands were earlier in their development. So, I think importantly I think we now have an exciting opportunity both with our proprietary product and with brands like Billabong, Roxy and O'Neill, and Hurley to do more in Juniors, and we are very pleased with the kinds of conversations and approaches we are having there, but as far as who the customer is. Best sense is it is a mix and if you ask me again on the next call I will probably have more insights I can share.

Moni Shapiro

Okay. Well, I will definitely follow up. And then can I just ask you a follow up on the Juniors side, I feel like there are a lot of moving parts, a couple of things I have noticed is several of the brands that you just mentioned seem to be little bit more absent at the department store level, which in my mind has got to help you, not hurt see. At the same time I walk in to your stores, and I thought the Roxy boots and things like that, they looked cute and I thought they added a lot of validity to your own styles. So if you can talk a little bit about as far as brands go what is happening to department store wise versus you guys taking a greater sort of share and command of those brands. And at the same time, I walked into a store, you know, there is lace, there is flowers, there are things that are not typically what I would PacSun. I think they look very good and I was wondering how difficult is it to get the customer in to buy to lace or flowers?

Gary Schoenfeld

Good question. So in terms of how difficult, I don’t think you become somebody’s favorite shop overnight. By the same token, what continues to make me confident in what is admittedly a very competitive Juniors marketplace is I think we can offer something which is distinctive, which is just what you mentioned, the combination of proprietary product and branded product.

And I think increasingly, we can develop relationship with our Juniors customer, where we would become one of her favorite stores again or maybe for the first time. And when the product really is right, it sells. So, when I mentioned we had a few wins in the second quarter, not too many that I’m about to shout off the rooftop about, but we have some items reflecting the fashion aesthetic that you speak of, a little more sophisticated and a little bit more truly on trend with the market as a whole rather than the plaids and neons referenced in the blog that I shared.

And we had some things that performed very, very well that any other retailer would have been pleased with those results. So long answer to your question in the sense that we believe good product sells. We need to be on trend, we need to improve in terms of our speed to market versus how we have operated, and at the same time as far as your question about brands, I really can’t speak to what decisions they are making or department stores are making. But in reality PacSun is the natural home for the brands that I mentioned Fox and Volcom, along with it.

So as we make progress, I think those brands are increasingly excited about working with us. I think we’re having some very healthy and candid conversations about the reality of the competition in the mall and price points, which are different than perhaps competition in the independent channels of distribution, and net-net I’m excited about where the business is going to go, but it is going to take us time to build it. But I’m looking forward to the progress I think we will continue to make.

Operator

Our next question will come from Stacy Pak from SP Research.

Stacy Pak - SP Research

Hi, guys. Congrats on the progress. I guess a few questions, one is just, talk a little bit more about how you used the systems to help you allocate product in this past quarter, and how that changes for fall, and whether you saw distortion in sales, i.e. better sales in those categories where you hoped to. So that is one question. Second, is there any change in your product cost with these brands that you are focusing on in the shops, do you benefit at all on the cost side of the equation. Third, for you Mike, two questions, are comps in-line, should we assume current comps are in line with Q3 guidance or do you need an acceleration to get there, and if you would comment on Juniors within that that would be great. And then last question Mike, can you give us the break down on the inventory, how much of that is footwear, how do we think about the inventories and where did those go end Q3, thanks?

Gary Schoenfeld

So, I’m going to pre-empt a couple of those, and say that no, we’re not assuming acceleration in comps from this point, and I think that would be foolhardy on 24 August to do that. So, to be very clear, no, we’re not assuming an acceleration on comps to achieve the guidance that we had outlined.

Stacy Pak - SP Research

So, Gary, you have had an improvement in run rate, so can you just address that, what are you seeing pick up business wise, what categories?

Gary Schoenfeld

You know, we have spoken to some of the specifics on Juniors, nobody has asked too much about young mens, so I will use this opportunity to do so. You know, as I said earlier, we continue to see a good performance and this relates to the first part of your question around localization and systems and store clustering. You know, staying in the shorts business, particularly in stores skewed towards warmer weather, that decision and that strategy has definitely paid off for us.

Similarly, our cut and sew business continues to be very strong led by On the Bias [ph] brands but then also supported with some of the programs with the other brands that we work with. And those would be some of the key drivers on the guys side, but I think we look at the guys business as a whole with the one caveat being what I already commented with regards to denim, an overall we continue to be pleased with how the guys business is performing, and remain confident in maintaining positive comps on guys through the balance of the year.

As to the other question you asked on inventory that is not something we are going to speak to them in terms of the details of inventory in one category versus another. I will just say and I think you have learned this about me in the year that I have been here. I was raised -- and two things my dad always emphasized to me that remain true and I carry with me. One is inventory kills businesses faster than just about anything else, and second as I said earlier, the time to have cash is when you don’t need it. And that cash is king.

So, we feel very confident with our inventory position. With regard to end of Q3, we have given you guidance on that, but we feel very comfortable with our flow of inventory, our flexibility around speed to market, and I’m comfortable saying we expect inventory going into Q4 to be roughly flat, very similar as it was coming in to Q3.

So circling back then to your first question around systems and localization and store clustering, as I already mentioned yes, we’re pleased with the progress that we have seen and how that has helped the business, and you won’t find boardshorts in Boston or Ann Arbor right now, but hopefully you will find them in California, Florida, Puerto Rico and Hawaii. And there is analogies to that in other categories. We believe that that has contributed to the margin enhancement. As Mike said, our merchandise margins were up approximately, actually a little bit better than 200 basis points in the second quarter, and we think that localization strategy going into the end of the second quarter and preparing for Q3 alleviated what would otherwise have been I think higher markdowns at the end of the second quarter. So, we’re pleased with how that is starting. We will continue to learn and get better in leveraging that as well.

Stacy Pak - SP Research

And then the last part was just on in working with the brands the way you are, closer and sort of focusing them in the stores where they are going to sell the best, has there been any change in the cost that you experienced with those brands?

Gary Schoenfeld

That has not been the priority of why we have gone about doing this. So…

Stacy Pak - SP Research

I understand that.

Gary Schoenfeld

The short answer to that is just that that has not been the priority. The priority has really been showcasing the brand. Are there different relationships and how that works, to varying degrees and all that, but it is not materially affected by different cost pricing per se.

Stacy Pak - SP Research

Okay, great. Congrats and good luck.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Christine Chen from Needham.

Christine Chen - Needham and Company

I was wondering you know that with the improvement that we have seen in the gross product, have you seen the average age of your customer tick-up, where was it probably a year ago, two years ago, where is it now and where would you ideally like it to be. I know it is a range, but what is that sweet spot. And then if you could comment on any regional differences and mall type differences and the performance of your stores. And then Modern Amusement will be priced similar to other products in your stores, or will it be priced higher? Thank you.

Gary Schoenfeld

So -- sorry, the first part of your question just say again.

Christine Chen - Needham and Company

The age of your Juniors, has it started ticking up?

Gary Schoenfeld

Yes, I mean, here is the way that I speak to internally is I think PacSun historically was very much a middle school and into high school. And we really wanted now to be about girls in college and high school. So, you can kind of do the math on that but -- and that is why I chose to share the comments from this blog, because I think they were accurate in kind of description about hot pink and lime green and neon plaids, I don’t even know what neon plaid quite is, but it felt pretty reflective of kind of what PacSun looked like not that long ago, and her comments about -- that is fine for a 14 year old, but not for me.

But I think it was pretty indicative of kind of where we were, and she references herself as a 20s style, I have no idea how old she is. I don’t know if she’s 36 or 19, but in our minds we think the week spot for that Juniors customer, as I say is really in college and high school, and then we know we will play on both sides of that, but we think we will play on the older side of that. And so part of what we’re getting back to school is mom to bring their daughters shopping and the daughters are excited, but there are some moms walking out with an item or two as well. And you know, we are not going to target moms for sure, but we don’t mind if she finds a sweater that she likes, or something else that she might like to take with her.

As to regional performances, I mean there are variations by region, again at this stage that is not something that I’m going to spend a lot of time discussing. You know, we turned this business around as a whole and that is why some of the details I don’t choose to get into on these calls, maybe that will change down the road, but at this point in time it is about kind of our overall performance and the changes that we need to make that I think we need to continue to speak to.

Christine Chen - Needham and Company

And then price points for Modern Amusement?

Gary Schoenfeld

We plan to price Modern Amusement a little bit higher than our typical kind of heritage brand positioning. And the launch of Modern Amusement will be focused on guys. So that is the answer with regards to pricing. Having said that, still at a much more accessible price point than as you would imagine it used to be when it was in Barney's or Selfridge's or at Fred Segal.

Christine Chen - Needham and Company

All right. Thank you and good luck.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Dorothy Lakner from Caris & Company.

Dorothy Lakner - Caris & Company

Thanks and good afternoon everyone. Congratulations on the progress as well and also I’m delighted not to see the neon plaids anymore. The stores really do look -- I really have to congratulate you, they do look a lot cleaner and the product really does look great. So my question is just where you are in terms of the breakdown, the percent of sales Young Men's to Juniors, obviously Juniors was probably quite a bit higher at one point. But where is it now, and where do you think it should be as you look out over the next several years.

And then my second question would be on marketing, just what you are doing in addition to the big events that Gary talked about at the beginning, what else you are doing to bring the customers into the store to make sure that they’re coming back in to see all of the things that you have done to the assortment? Thanks.

Gary Schoenfeld

I appreciate it. So, in terms of the mix, I don’t have a point of view yet long-term where that percentage needs to land. I believe we can grow those parts of the business, and that is really the focus that we have as a team. I can speak to in terms of where it has been more recently. It has been where guys has guys has creeped up into the mid-50s as a percent of the total business. It has sat in something close to the 50-50 range for much of the last few years, and you know I think that we have got some healthy internal competition, and girls are looking to see their share certainly grow, and I think that over time it will. But we are excited about the growth of the guys business. So, I can’t give any more clarity long term about where those percentages will shake out.

From a marketing perspective, you know, I think there are several aspects as we go forward. First is, as I say, we got 900 billboards that a lot of people walk by everyday, and so we want to continue to execute our windows a little bit differently, get some people to pause and kind of notice what is going on. We figured when everybody else has got their typical back-to-school sale messages, we thought it would be kind of fun because in the life of our customer, it really is about happy New Year, and what is going on new in their lives, moving into their dorms et cetera, et cetera.

So, I think you’ll continue to see us use our windows to feature product, to feature our heritage and the importance of our brands in action sports, but at the same time not limit ourselves to that and continue also to capture the fun and entrepreneurial spirit, which we think PacSun and California should stand for. So you will see that continuing. So, what we do in windows, what we do in store and how we tie those elements together that continues to be a priority.

Secondly is working even more closely with brands on different opportunities for promotions and things that will be meaningful, those are both in store and online. And as I mentioned online, that is really kind of the next big frontier that we need to advance the ball on is really start to engage in this whole social media and online world. And we’re doing a bit of it, but I think there is a lot more opportunity to really engage at that level and get good at that. So, those will be probably three of the things that I would speak to that with an eye towards holiday, we certainly plan to make progress on, but certainly as we look well beyond into next year and further those will continue to be priorities for us.

Dorothy Lakner - Caris & Company

And if I could just add another question to that. In terms of the brands and the shops that you're either talking about or already have in place, kind of where are you in that process and how are you deciding who to -- which brands to put where? Kind of where -- how many stores and I know you talked about 10% of the store base before, but where are you in terms of the shop concepts?

Gary Schoenfeld

So, again, I think the bigger focus is representation of brands and great merchandising. So, the shop in shops are one element of that, and we have certain stores that have got additional space that lend themselves to that. We have other stores that don’t. So there is a finite number of shop in shops, but more importantly you know, up until pretty recently you never saw brands really merchandised as brands. So whether it is a shop, a table…

Dorothy Lakner - Caris & Company

Right.

Gary Schoenfeld

That is what we are going to continue to do.

Dorothy Lakner - Caris & Company

You're clearly doing that now.

Gary Schoenfeld

To the second part of your question, where are we in terms of the brands, what I would say is the heritage brands and the relationships we have re-established over the last 12 months, I can say across the board I’m very pleased with how we’ve fixed those. And those conversations and those meetings around creativity, around new ideas, around exclusive products, around marketing ideas, those conversations and what is coming out of those conversations are dramatically different than they were 12-15 months ago. I’m happy about it. Similarly I think the brands are happy about it given our position in the marketplace.

On the emerging brands front, you know, quite honestly a year ago there were a number of brands that said, gee, why would I want to be selling in PacSun. And I vividly remember going to first day of star show [ph] 15 years ago when I started to advance and how much of an outsider we felt there. to be honest it was that different 12 months ago when I went through my first Agenda show in Huntington Beach. What I'm pleased to say is that felt different a few weeks ago that those brands are also noticing the changes we are making. There are seeing brands like Ruka [ph] and WeSC featured in a very exciting way and how that is growing.

We are also beginning to do some things with some of the other smaller brands whether it is Atwater or Maddox or Fresh Jive [ph] that is exciting and Insight. So, we’re making good inroads on the emerging brands front, Modern Amusement and working with Moss on that I think is a great opportunity for PacSun, and yet having said all that, there is still a few other brands that at this point still are not ready to add another channel of distribution the size of PacSun, but we are hopeful that we will continue to make progress and add a few more of them in the not too distant future as well.

Dorothy Lakner - Caris & Company

Great. Thanks and good luck.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Jeff Van Sinderen from B. Riley.

Jeff Van Sinderen - B. Riley & Company

Hi, let me add my congratulations on the sequential improvement as well. It's great to see. Gary, on the Juniors business, just wondering where you feel like you are in terms of the assortment reflecting the new merchant. In other words, for the back-to-school season, how much really had her influence? As then as we get into holiday, will she totally own that assortment?

Gary Schoenfeld

So, I think Christine joined at the end of February, and as I spoken to before not a lot of depth in her team underneath here. I’m quite pleased with the progress that she has made both in terms of her leadership and what that has meant in terms of new direction of the business, similarly the talent that she has been able to attract and the team that she’s starting to develop. So we got a lot of work to do to fix this business.

So, as I mentioned earlier, Spring is really the first season that she will be able to own soup to nuts, and while speed to market is important, there still is a portion of the business that still gets developed of course through traditional timelines give or take 10 to 12 months with everything that that entails in terms of trend research, fabrication, testing and development. So the answer is we’re better off with back-to-school than we would have been had she not joined.

We will build on that and be better in holiday as she and her team get further up to speed, and I think we will continue to make progress as we go into 2011.

Jeff Van Sinderen - B. Riley & Company

Okay. And then any challenges you're seeing in terms of sourcing, private label for Juniors or is that pretty much as you would expect it to be in the environment that we're in?

Gary Schoenfeld

You know, I have said before, fortunately one of the strengths within PacSun when I joined was our product development team. We have challenged that team as we have changed key categories, and changed the aesthetic and what we’re needing to do. And that has meant identifying new sources. So the product development team has really stepped up and supported that change.

Christine and other merchants that she has bought on board have also brought with them contacts and relationships that we have tapped into as well. So, I think the progress that you are seeing in stores speaks for itself, but at the same time it is not without a fair bit of work behind the scenes to make it happen, and we will continue to explore new relationships, and I think that that will continue to over the next 6, 12, 18 months.

Jeff Van Sinderen - B. Riley & Company

Okay. And then in footwear, are you micro merchandising or localizing what's going on with footwear at this point? In other words, are we pretty much -- do we have the same number of SKUs and the same brands in each store at this point, the same concentration of footwear, or is there a variance between what you have in different markets?

Gary Schoenfeld

There is that variation. So, there is a core assortment inall doors, and then there is a variation. And we will learn from that and evolve what works well in all doors versus what matches up with certain doors better than something else.

Jeff Van Sinderen - B. Riley & Company

Okay. And then let me ask you in terms of -- I know you've been working quite a bit on trying to improve the selling culture and the customer experience. Where do you feel like you are in that process at this point and I guess what do you feel like there's left to do there?

Gary Schoenfeld

I think given where we started the year ago and 11,000 people, if we allow myself to think this way, we have probably made about as much progress as you can realistically make in a year. And the reality is, the experience has improved. So we have made progress, but we got a lot more that we want to be, and we want to provide great service and a great level of engagement with a high degree of passion, brand knowledge and fashion knowledge, and we got a lot of work to do still to make that happen. But I’m delighted with Paula’s leadership. Underneath Paula, we have made some I think some very exciting changes in the leadership underneath her. And we need to continue to strengthen that team, as well as provide even more effective tools.

But I think most importantly we are starting to become a retailer that talented people want to come and be a part of, and I think that is going to be one of the biggest wins for us, and not something that I could have said 12 months ago.

Jeff Van Sinderen - B. Riley & Company

Good to hear. Thanks very much, and good luck for the rest of the quarter.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Linda Tsai from MKM Partners.

Linda Tsai - MKM Partners

Hi. Thanks for taking my question. As you're gaining traction in your merchandising initiatives, and you have better reads on what's working versus what isn't, what's your thinking about what the right breakdown is between branded and private label as it relates to the guys and girls divisions?

Gary Schoenfeld

You know, I don’t know that we have fully cracked the code on that nor are we attempting to precisely manage that anyone number. What I will say continues to prove true is guys love brands, and we expect brands to continue to drive our guys business. Within that parenthetically, I will say it is kind of exciting to see On the Bias start to really become recognized as a brand, and we were talking yesterday about if you go on Facebook, you now can find On the Bias, and people are wondering, gee, how can we only get it at PacSun, and some of that is complementary and some of it is not. They wish they could find it elsewhere.

But net-net our heritage brands, emerging brands will continue to drive the guys business. On the girls business, it is different. The vertical retail and fast fashion that gives her so many alternatives at pretty compelling pricing frankly puts a lot of pressure on the branded model. So we remain committed to working with our key heritage brand partners, and finding opportunities to make the branded part an important part of that assortment, but at the same time I continue to believe that our proprietary product will be the bigger piece of the girls business.

Linda Tsai - MKM Partners

And then just a follow-up with respect to the On the Bias brand, what have you done there? What would you attribute your success to in terms of that private label working?

Gary Schoenfeld

Well, I would attribute it to Charlie and his team creating great product. But let me elaborate that a bit, I think the vision that he and the team had was really seeing an opportunity to create a brand that really stood out in terms of materialization. And that is what I think On the Bias has really become known for, and it started with the cut and sew business, you are now seeing the execution of that in fleece, and it is increasingly becoming something that guys are really identifying with.

Linda Tsai - MKM Partners

Thanks and good luck for third quarter.

Gary Schoenfeld

Thank you. I think we have reached our intended time, but I understand that there are two questions left in the queue. So, we will take those last two questions and probably run five minutes long.

Operator

Our next question will come from Lee Giordano from Imperial Capital.

Lee Giordano - Imperial Capital

Provide an update on the real estate strategy? How many more underperforming stores do you think you could potentially close as leases come up for renewal, and I guess long-term, what do you see as the ultimate size of the PacSun chain? Thanks?

Gary Schoenfeld

Sure. You know, as we have said before, I think what we’ve experienced in our negotiations and discussions and landlords, as you might imagine, they are not anxious to see us depart too many malls, and they too are noticing the progress that we are making. So from 880 stores that we are today, as we have indicated previously we do expect that number to shrink probably something in the range of 850 to 860 doors by the end of this fiscal year.

Beyond that probably10% to 15% of those remaining doors are underperforming doors that all things being equal, we would assume just get out of. But all things aren’t equal, and landlords would just assume that we keep those open. And what we found is we have ended up doing short-term renewals at rental rates that get those to where they are not a cash drain on the business. So, I think for the near to medium term, we will probably find ourselves in the range of 800 to 850 stores, longer term, it may end up something less than that.

But there is too many variables at play to give any clear guidance in terms of how that is likely to end up.

Lee Giordano - Imperial Capital

Great, thanks, and good luck.

Gary Schoenfeld

Thank you.

Operator

Our next question will come from Charu Sharma from KeyBanc.

Charu Sharma - KeyBanc Capital Markets

I had two quick strategic questions for you, Gary. So as you said, this marks your first year anniversary and just stepping back looking at this past year, this isn't the first time PSUN has gone through strategic initiative changes, and I just wanted to gauge your comfort level in terms of where this strategic initiative stands, so in terms of adding more private label to the junior side, the shop in shops concept on the men's side? Do you feel that from a kind of strategic perspective is it still in the trial and error phase or are you pretty comfortable with where you are now in terms of perhaps changing or adding anything?

And the second question I had for you was the men's and women's product, obviously noticeable changes and they seem to be going in the right direction but as you alluded to before, it's a different direction for both businesses. So on the men's side, you're appealing perhaps to fill the niche Action Sports lifestyle oriented consumer. On the Juniors side, you're appealing perhaps to a more broadly based consumer, the high school, college aged girl. Do you see that as a conflict in terms of managing almost it seems like two separate businesses from a merchandising and brand identity perspective? Do you worry about how that would fit into the mall landscape?

Gary Schoenfeld

So, good questions. As to the first one -- no, I’m actually quite pleased that you know, the strategy that I articulated to the entire company the first week that I joined really remains the foundation of how we’re driving the business going forward and it’s what attracted me to the opportunities. So it’s reiterating, and I don’t think PacSun ever has thought of its business really this way, but this is first and foremost a product driven business that the way PacSun is going to win is by its unique offering around three categories of products, which I have termed our heritage brands, our proprietary brands and then emerging brands, and you heard me explain that enough that I don’t need to elaborate.

So in terms of strategy you know, what we outlined at this point continues to feel very much the right strategy, and in terms of my confidence level you know, we’ve seen improvement in every quarter that I’ve been on board in the young men’s business and it is now turning the corner to positive comps. And as we mentioned improved merchandise margins along with those positive comps, and on the Juniors business into the second part of your question, which is a good question, actually I look at it almost the opposite.

I look at the same sort of set of facts almost the opposite as the way you described it in that as you’ve heard me say before what I was hearing last summer was PacSun was the store for the older brother and the younger sister meaning that actually there is quite a disconnect between what the guys was representing, which was a college and high school customer and versus the girls that was much younger. So, I actually think that today we’re executing a very cohesive strategy and that strategy lies in the mix of lifestyle, fashion, and action sports all tied together through PacSun’s California filter, and well the emphasis of brands and guys affinity towards brands plays a bigger role on the guys side of the business.

As I say it’ll continue to be an important component of the Juniors business, but at the same time what I would say slightly differently than you is I don’t think our guys business is a niche action sports business today whatsoever, action sports and those brands are certainly an important foundation, but when you look at the products coming from those brands some of it speaks very directly to action sports and skate and surf and motocross in particular, but the reality is the guy customer today thinks much more in terms of lifestyle overall, and fashion and his own sense of style quite a bit more than I believe existed in this market 10 years ago.

So net-net strategy I think remains very much on track to what I envisioned the day I walked in, and I actually feel quite good and I think it’s really important that PacSun is a brand and is a retail destination actually conveys a very consistent and congruent message between girls and guys, and I think we’re actually beginning to deliver on that better than we have in a long, long time.

Charu Sharma - KeyBanc Capital Markets

Great. That's helpful. Thanks, Gary and best of luck.

Gary Schoenfeld

Thank you. Well, I appreciate everybody’s interest. Begging for one more question all right, all right, one more question.

Operator

Our final question will come from Betty Chen from Wedbush Securities.

Connie Wong - Wedbush Securities

Hi. This is Connie calling in for Betty. Thank you for taking my question. Mike, I was wondering if you could talk about SG&A. I know that you didn't provide any specific guidance for Q4, but looking at the guidance for Q3 and also for fiscal 2010, looks like we're looking for an increase in dollars year-over-year, and I was wondering if you could speak to the drivers of that. Is that because you're up against declines last year? Any color would be helpful. And then I have a couple of follow-up questions.

Michael Henry

Yes, we are not providing any specific guidance to Q4 at this stage. You have the annual range that we specify as 305 to 310 now versus our prior range of 310 to 320. You have the actuals through the first half of the year and then we gave Q3 at 74 to 76. So you can get them back into the fourth quarter numbers, but not prepared to provide any more specificity on (inaudible).

Gary Schoenfeld

I think importantly, I mean you can do the math a few different ways. What we can say is we were not anticipating a big increase in SG&A. So if that says when you do the math we’re probably not going to end up at 310, then it may be that we’re not going to end up at 310 because we don’t see at this point something hugely that’s going to change that.

Connie Wong - Wedbush Securities

Okay. And then could you also remind us at what comp leverage or what comp would you need to leverage expenses at this point? Like a low single digit, mid single digit comp?

Gary Schoenfeld

Again, I don’t think that a question that we’re prepared to speak to. Obviously it’s a lot easier to leverage expenses when comps are going in the positive direction. So that remains our focus. Is positive comps in the fourth quarter a lay up? It’s not. We continue to aim for that and -- but as I also said at the same time we are going to be, you know, very mindful of inventories.

We see trends unfold and you know, our focus is about long-term fixing this business, but as we’ve indicated inventory remains a focus. You’ve seen in the guidance we’ve given for the year expense management remains a focus and overall you know, I think we had good discussions today on the priorities of how we need to continue to make progress. So with that I will thank everybody for the interest, and wish you all a good end of summer, upcoming Labor Day, and we speak to you on our next call. Thank you.

Operator

Ladies and gentlemen this does conclude today’s conference call. Thank you for your participation. You may now disconnect.

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